Co-ops to sell off fertilizer firm

A mutually beneficial relationship between fertilizer maker CF Industries Holdings Inc. and the co-ops that own it  and, until recently, have been its primary customers  is coming apart.

A mutually beneficial relationship between fertilizer maker CF Industries Holdings Inc. and the co-ops that own it  and, until recently, have been its primary customers  is coming apart.

The players plan to part company via a $700-million initial public offering  potentially one of the biggest IPOs this year. The catch: The eight farm-supply co-ops that own CF plan to collect all the proceeds.

Long Grove-based CF hasn't said how many shares will be issued and hasn't set a price. There's also no target date. But in the firm's registration statement, the owners say they plan to whittle their stake in CF to 25% through the IPO.

Harvesting $700 million from the IPO would put CF in rare company. Just 12 of the 216 IPOs in 2004  about 6%  exceeded $700 million, according to IPO analyst Renaissance Capital in Connecticut.

Analysts doubt a fertilizer maker has the pizzazz to generate $700 million, and predict CF will lower its sights.

"We've seen a lot of commodity-type businesses go public lately and they try to get aggressive, but investors are not playing that game," says Tom Taulli of California-based IPO research firm Current Offerings LLC. "They're not ponying up as much money as they were even a few months ago."

Moreover, CF's co-ops have been buying less from CF. In 2002, the co-ops purchased 6.01 million tons of fertilizer from CF, or 75% of CF's sales. In 2004, co-ops bought 4.47 million tons, or 53%.

DIVERSIFYING ITS CUSTOMER BASE

CF declines comment on the IPO. The registration statement points to improved earnings as proof that CF is headed in the right direction. The company also says it has been diversifying its customer base anticipation of eventual disconnection from the co-ops.

But 2004 was CF's first profitable year since the late '90s. The rising price of natural gas  a key ingredient in nitrogen and ammonia fertilizers  triggered a spell of losses.

Natural gas used in fertilizer-making averaged about $2 per million British thermal units in the '90s. By 2004, prices had risen to an average of $5.85. As prices rose, fertilizer buyers turned to producers in China, Russia and the Middle East, where natural gas cost far less.

The market turned in CF's favor in 2004. Increased fertilizer consumption overseas as well as bankruptcies and plant closings in North America shrank inventories and gave CF leverage to boost prices. Freed from the price limitations of the co-op structure, analysts expect CF to be more market-oriented post-IPO.

"That will be a godsend for them, because that's what's been killing them," says David Cent-ko, a consultant with Blue Johnson & Associates in Tennessee.